CTS Spotlight for the week of November 12th, 2010

Hello and welcome back to CRI's CTS Spotlight

11/12/10: In a week that saw little change to most commodity trends, the US dollar bounced enough to trigger some aggressive stops. While we are still a bit above our downside target for the dollar index, one can't help but get the feeling a dollar rally/commodity sell-off is very close. Additionally, we have been looking for the market to rally into the US mid-term congressional elections and we got it. Now that the event has come and gone, a period of consolidation shouldn't be too unexpected. Interestingly, Japanese stocks have bottomed and now join the rest of the world's equity indexes in rally mode. This is probably because Japanese exporters see a US dollar bottom/Yen top coming. However, the fact that all world stock indexes are moving higher (in unison) suggests the equity bull run is very near an end.  

Japanese Stocks (Yen vs. Dollar) 

A few weeks ago CRI examined the Japanese Yen and suggested we were in the late stages of a Yen rally/US Dollar sell-off. So much so that and one ought to consider taking the other side of the trade when it eventually reverses. While the Yen's price action isn't quite bearish yet, there are a few signs that the Yen Bull might be loosing steam.

If one looks at stocks as a harbinger of growth to come, then one must clearly get the message that the world economy is expanding once again (S&P 500 hit new 52 week high last week). From Europe to the Americas to Asia, growth is once again quite alive. It is interesting to see that while the US economy was faltering, money was moving in earnest into the Japanese Yen. This 'flight-to-safety' not only pushed to Yen to multi-year highs vs. the dollar but it also destroyed any profits Japanese exporters enjoyed while selling their product into the US market. Now that the US economy (and with it the primary world growth engine) seems to be back on-line, one can clearly get the feeling money is starting to move back into the US. As well as the dollar index breaking its most recent resistance point (and associated stop level at 78.364) the Japanese stock market has finally put in a respectable bottom. Additionally (as CRI has pointed out over the past few weeks) bond prices are breaking down (and inversely interest rates are going up). 

So if one puts all of this together, it would seem rather clear that the US Fed's policy (flooding the market with liquidity until the US economy regained some traction) has worked. The Fed's finesse of the yield curve has induced a steepening of the curve. Long bonds are topping and equities are moving higher on this.
 

Now for the problem: Almost every time I have seen ALL the world equities rallying at the same time, we are very close to a top. The fact that Japan wasn't participating was actually good as we here in North America could quietly move higher (under the proverbial radar screen). This is no longer the case as the public is starting to pay attention to the euphoric moves higher in stocks. Unfortunately both rising interest rates and already high commodity prices shall act as a break on too much more of the equity rally......

So enjoy the rally while it lasts and understand that we are getting very late in this world economic expansion so much so that even markets that shouldn't be going up are starting to...

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com